Chinese press FIRB to relax coal promise

Chinese-owned Yancoal Australia plans to push Australian regulators to allow it to back-track on undertakings it made to secure control of local coal assets in 2009 as part of its planned $8 billion merger with
Gloucester Coal
.

Yancoal will seek to avoid or delay having to reduce its interest in the mines in NSW and Queensland to the levels it promised to the Foreign Investment Review Board as part of its $3.5 billion purchase of
Felix Resources
.

If an agreement is not reached, there could be future negative implications for Gloucester shareholders.

Yancoal could be forced to sell a stake in the merged company, or possibly key assets, by the end of the year. Alternatively, it may need to raise equity or dilute shareholders through scrip purchases of additional coal assets. The Australian Financial Review understands Yancoal and its advisers are preparing presentations to lobby the agency for changes in the coming weeks, in part citing altered economic conditions.

Yancoal’s parent, Yanzhou Coal, committed to the strict undertakings at a time of heightened concern about state-owned groups investing in Australian miners in October 2009.

After high-profile investment attempts by Chinese state-owned companies in groups such as Rio Tinto, Fortescue Metals Group, OZ Minerals and Lynas, then FIRB executive director Patrick Colmer in September 2009 made rare public comments indicating investments should be limited to less than 50 per cent of undeveloped projects and 15 per cent of major ­producers.

Yancoal agreed to a set of stringent conditions to gain approval for the Felix deal. These included a commitment that by the end of 2012 it would own less than 70 per cent of the company – to be listed on the Australian Securities Exchange – and 50 per cent or less of the mines it purchased under the Felix takeover.

Those undertakings will not be fulfilled through the Gloucester deal, which will result in Yancoal owning 77 per cent of the listed vehicle, giving it an interest of between 62 per cent and 77 per cent of the former Felix assets. Before announcing the Gloucester deal in late December, Yancoal held unsuccessful merger discussions with
Whitehaven Coal
and
New Hope Corp
.

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Both of those companies are larger than Gloucester and a scrip deal could have allowed Yancoal to own a smaller stake than 77 per cent in the combined entity, but no agreement was reached.

Yancoal also considered undertaking a float that would have required it to raise at least $1 billion of equity – an amount larger than any that occurred on the ASX in 2011.

A Yancoal spokesman said yesterday that if the Gloucester transaction proceeded, the Chinese company would have moved “significantly well ahead of time to have satisfied the undertakings given to FIRB at the time of the Felix transaction".

But sources indicated that in upcoming discussions with the FIRB, Yancoal was likely to emphasise a clause in the Felix agreement that allowed the Treasurer to vary the undertakings if it was considered that “economic conditions or other factors potentially mean it cannot be met".

In the scheme booklet for its bid for Felix, released three weeks before it was granted FIRB approval for the deal, Yanzhou gave the first public indication it planned to list the assets on the ASX within two to three years, subject to market conditions.

“For this purpose, a good indication of market conditions would be the ASX/200 Index and Newcastle benchmark thermal coal prices being not materially below their current levels," Yanzhou said.

The ASX/200 Index is now 13 per cent lower than it was then.

However, the spot price of thermal coal is 53 per cent higher and the number of options for investors seeking exposure to a sizeable Australian coal producer has diminished due to the multibillion-dollar foreign takeovers of Centennial Coal, Macarthur Coal and Coal & Allied Industries.

Another condition that will not be fulfilled by the Gloucester deal is Yanzhou’s agreement in 2009 to hold all of its Australian assets in Yancoal.

The Gloucester deal will exclude Felix’s Athena project and the Cameby Downs mine in Queensland, and Premier Coal assets in Western Australia that Yancoal purchased in separate acquisitions last year.

A senior lawyer experienced in representing Chinese state-owned enterprises in deals requiring FIRB approval said the stringent undertakings Yanzhou had agreed to in the Felix deal were unusual.

“FIRB was requesting these things [like relisting] at the time," the lawyer said. “For the most part, people said no and [FIRB] went away. It doesn’t seem to be a condition they have used a lot."

For example, China Minmetals was able to purchase all of the assets of OZ Minerals except for the Prominent Hill mine, with no requirement for a relisting. But the lawyer said it could be difficult for the FIRB to make major modifications to the undertakings at this point because Yanzhou had given public assurances they would be met. “It raises the issue of how FIRB actually enforces its conditions," he said.

If the Gloucester deal is completed, Yancoal’s large stake in the combined entity means it will need to seek FIRB approval each time it wants to buy another asset or shares in a company or convert an exploration permit to a mining licence.

“[Yancoal] would want to be on the good side of FIRB," the lawyer said.

Mining analysts have for the most part factored in the need for Yancoal to reduce its stake in the merged entity below 70 per cent following the Gloucester deal, but few have publicly noted the need for Yancoal to lower its stake in the Felix assets to 50 per cent or less. “That is something I haven’t factored into my numbers yet," CLSA analyst James Stewart said.

He said Asian utilities would be the most likely buyers of small direct stakes in the former Felix assets.

But he added Yancoal could also seek to reduce its stake in the company – and therefore its interest in the assets – by purchasing other assets using scrip or raising equity to help lower its expected $3.4 billion debt load following the deal.

It is unclear whether the FIRB issues will be settled before Yancoal releases its scheme booklet around late February. If not, an update on the status of the approvals process will be provided at that point.

Yancoal has already filed its FIRB application. FIRB has 30 days to make a decision unless it chooses to extend the period by 90 days.

Alternatively, Yancoal could choose to remove then relodge its application before the initial 30 days are up to give FIRB more time for ­consideration.